The higher the THC content, the higher the state tax?

As the legal cannabis industry begins to flourish, a new threat looms on the horizon: the dreaded potency tax. Retailers and consumers alike would feel the crisis as products higher in THC, the psychoactive compound in cannabis, would be taxed at a higher rate. This buzzkill tax would target the heart of what makes cannabis so popular — its potency.

Imagine walking into your favorite cannabis dispensary only to find that your favorite strain is now priced heavily thanks to the potency tax. The once affordable indulgence now feels like a luxury, forcing you to settle for a less potent option. It’s like ordering a craft beer only to find it’s been watered down to save on taxes.

But it’s not just consumers who will feel the sting of this tax. Small business owners and independent farmers, who often operate on small margins, would also be hit hard. They may need more resources to handle the complexity of such a tax, further concentrating the industry in the hands of a few large corporations.

New York’s new recreational cannabis tax regime

As New York’s recreational cannabis market lights up, one aspect has sparked a fiery debate — the tax system. Some fear that like a puff of smoke it will blow out the flame of licensed businesses and chase consumers to seek cheaper deals from illegal traders.

A December white paper by two New York tax attorneys fueled concerns just before recreational cannabis officially launched on Dec. 29. They predicted, and unfortunately came true, that a legal eighth of a cannabis flower in New York with 30% THC would cost $75. A steep price for an easy treat, and one that could persuade consumers to seek greener pastures from illicit sellers.

Housing Works, the pioneer of state-sanctioned cannabis retailers in the five counties, opened its doors to eager customers ready to experience the legal high. However, prices proved a bit of a buzzkill as they fluctuated due to taxes based on THC concentration. The nonprofit’s online menu offered a range of options, from the subtle 19% THC costing $40 to the more potent 27% costing $60. But like a hidden trapdoor, an additional 13% excise tax would be added, bringing the final price range between $45 and $68.

As the legal cannabis market grows, so do concerns about pricing. Data from other recreational marijuana markets suggests that customers are price-conscious, only willing to pay a premium of 10% to 15% over prices in the illicit market.

That information guides the paper, authored by attorneys James Mann and Jason Klimek. They suggest that for the legal market to thrive, prices must remain competitive with the underground market, as customers will not be willing to pay more for the same product.

Ensuring that prices are fair for consumers and retailers is a delicate balancing act. The legal cannabis market is still young and prices need to be set correctly to avoid driving customers back to the black market.

In stark contrast, unlicensed street vendors in New York City were offering cannabis eighths at rock-bottom prices, with the Green Market Report finding prices ranging from $10 to $45.

This, coupled with the lack of enforcement of the underground market, can cripple state-licensed retailers, particularly smaller, less capitalized businesses. Klimek and Mann argue that this could prevent them from establishing themselves in the market before they even have a chance to take off.

The situation isn’t too bad.

Charles King, CEO of Housing Works, is optimistic about the future of legal cannabis retailers. He believes businesses can survive as long as they stick to a solid retail business plan and capitalize on the tourism market.

He believes consumers understand that when they pay for legal cannabis, they are paying for quality, taxes and all other costs associated with a regulated and licensed market. He remains confident that legal cannabis retailers can thrive despite competition from underground markets.

Despite King’s optimism, he concedes that more focus needs to be put on enforcement against illegal government competition. This is a significant task as many illegal operators have already built brand awareness by selling legally produced but illegally shipped California and Oregon cannabis, such as B. the well-known SoCal brand Jungle Boys.

Joe Lustberg, a managing partner at Upwise Capital, said he recently came across the brand name at a smoking store. New York City residents like Lustberg could be tempted by these illicit but familiar options, making it even more important for state agencies to crack down on the illicit market.

“It’s a tough spot for legal cannabis operators competing with the smoke shop next door that can sell California eighths for $30. Other than that, the weed is better than what they sell at Housing Works,” said Joe Lustberg.

Legislators may also change the tax structure, as improving the system to make it more business-friendly is a top priority for Albany industry interests, including the Cannabis Association of New York. With the current tax system, it is difficult for licensed retailers to compete with illegal suppliers who can offer better prices and products.

According to Brittany Carbone, a cannabis farmer in upstate New York and a board member of the Cannabis Association of New York (CANY), she is confident that the state is aware of the pot tax issue and is open to reform. She explained that it is common knowledge that more sensible tax structures lead to higher purchase rates in legal pharmacies. And that ultimately translates into a positive net gain for the state in terms of tax revenue.

Even if the tax structure doesn’t change, according to cannabis advocate Lauren Rudick, the THC-based potency tax will likely encourage the creation and sale of a more diverse range of cannabinoid products that don’t rely solely on THC to satisfy consumers. And that could be exactly what the up-and-coming industry needs: more product variety.

Cannabis advocate Lauren Rudick believes that even with the tax structure unchanged, the THC-based potency tax will likely stimulate the development and sale of a broader range of cannabinoid products that appeal to consumers without relying solely on THC. This could be of great benefit to the burgeoning cannabis industry, as it would result in greater product variety for customers.

Conclusion

As the legal cannabis market takes shape in New York, the potency tax has become a contentious issue. Critics argue that this could drive consumers to cheaper underground dealers and undermine licensed businesses. However, others see potential for the tax to encourage innovation and diversity in the industry as a broader range of cannabinoid products are developed and sold to appeal to consumers. Only time will tell if the tax will prove to be a major buzzkill for sanctioned cannabis retailers or if it will pave the way for a thriving legal market. Regardless, the industry will face challenges as it moves forward, but with a little creativity, it could rise above them and thrive.

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